Investors should "get ready" to snap up bargain bonds following a bruising sell-off in debt markets last week, according to Dan Ivascyn, the chief investment officer of credit trading house Pimco, which manages $2tn in assets.
The recent selling spree has pushed yields — indicative of the return on offer for debt investors if they buy into the market today — to levels not seen since the coronavirus-induced market turmoil. This has raised concerns over the health of corporate credit markets but also lured in investors willing to stomach the risk in return for a potentially high reward.
"There's a pretty good chance in this environment that you see some overshooting, which means to be careful buying now, but get ready for what could be an even more attractive opportunity for those that are a bit more patient," Ivascyn said in an interview with the Financial Times.
Pimco was founded by "Bond King" Bill Gross and is renowned as one of the largest bond trading houses.
Higher-quality, "investment-grade" bonds have been selling off this year after the Federal Reserve signalled it would shrink its balance sheet and raise interest rates. Lower-quality, "high-yield" bonds had proved more resilient until this month, when this riskier corner of the debt market began to crack.
Ivascyn is not the only investor tentatively suggesting this week that the risks to corporate bond markets — not just from the Fed but also from supply chain disruption, soaring commodity prices and war in Europe — were now worth the reward.
KKR's co-head of credit and markets Chris Sheldon wrote on Friday that his team favoured the debt of companies less exposed to the turning economic cycle, yet still warned that "it is important to get comfortable being uncomfortable . . . The market ride is likely to continue to be bumpy but we think it is prudent to stick with conviction, fundamentals and seek out opportunity through the volatile moments."
Bank of America's credit analysts on Friday noted that while the sell-off could have further to run, "we suggest taking materially more risk here".
AdvertisementAdvertise with NZME.
Ivascyn was not quite so bullish, saying instead that he favoured higher-quality assets such as mortgage bonds, investment-grade corporate bonds and bank debt, especially of US lenders.
"We have been reluctant to go aggressively to lower-rated credit or credit that would be more exposed to a more significant economic slowdown," he said. "But we are beginning to see some real interesting, more attractive valuations in some of the higher-quality areas."
At the lower end of the credit-quality spectrum, he said Pimco's private credit team, which typically lends directly to companies and buys bulk packages of loans, was looking for opportunities in public markets, similar to investment houses such as Ares and Apollo, which have both helped salvage struggling bond deals in recent weeks.
Apollo helped re-work a bond for online car dealer Carvana, committing to almost half of the $3.28bn the company eventually raised. Pimco also snapped up some of the bond, according to people familiar with the deal.
"Our private team has stopped putting money out as aggressively in those areas in the private space that have lagged the public market, and explicitly crossed over to take advantage of the price declines to buy a similar risk in the public market that is a lot cheaper and more attractive because it is adjusted," Ivascyn said.
Written by: Joe Rennison and Brooke Masters in New York
© Financial Times